He stressed that the health of employer-sponsored pensions is “extremely important” for both the security of Canada’s retirees—for whom private pensions represent almost 30% of retirement income—as well as to the country’s financial efficiency.
Solving the problem, he argued, is all about correcting “the distortion of incentives” that currently deters employers from starting up or maintaining DB plans. First, since they are responsible for pension deficits, plan sponsors—and not members—should own pension surpluses. Second, tax rules which discourage employers from fully funding their plans need rebalancing. And pension accounting standards, which “lead to volatility in reported earnings,” need to be addressed, said Dodge.
It was a fitting end to a tumultuous year for Canada’s pension industry. Despite some bright spots—the removal of the foreign property rule, and the release of a number of consultation papers recommending ways to reform the system—it wasn’t a stellar 12 months for DB pensions. Despite a healthy stretch for capital markets, low interest rates continued to drive up pension liabilities. A study released last month by the Certified General Accountants Association of Canada showed that the funding shortfalls in large private sector DB plans climbed significantly in 2004, to $29 billion from $26 billion in 2003.
Just as telling as Dodge’s remarks is the fact that the Bank itself is currently embroiled in a legal dispute with its own pensioners over the surplus in their plan. The Bank of Canada Pensioners Association alleges that, since 1993, the Bank has misused $12 million worth of the plan’s surplus to pay for administrative costs. If the battle over the Bank of Canada Pension Plan surplus is any indication, implementing Dodge’s recommendations is going to be akin to taking candy from a wolverine.
In the meantime, Canada’s defined contribution(DC) pension industry has been quietly maturing. While conversions to DC plans have slowed from earlier years, industry folks interviewed for the 2005 Capital Accumulation Plan Report(see 2005 CAP Report: Seeing Beyond)are predicting a full-scale exodus from DB plans over the next few years, as Canadian employers come to realize the full extent of their funding dilemma.
Whether we get our DB house in order or whether pension plans move en masse to DC remains to be seen. Whatever the outcome, it’ll certainly make for an interesting 2006.